Amicus Curiae Brief — United States v. Byrum

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FER CLERK

_ IN THE ©

- Supreme Court of the Anited States a

OCTOBER TERM, 1971

- No 0. 71-308

e .

Unitep States oF AMERICA, ;

. | Petitioner, -

| tiene A. Braun, Executrix Under the Last Will

and Testament of: MILLIKEN C. Byrvum, Deceased,

Respondent.

ON WRIT OF CERTIORARI TO THE: UNITED STATES. °

' _ GOURT OF APPEALS FOR THE SIXTH CIRCUIT

BRIEF OF HOWARD GILMAN, CHARLES GILMAN, JR.

‘AND SYLVIA P. GILMAN, EXECUTORS OF THE WILL, 7

OF CHARLES GILMAN, ‘DECEASED, AS AMICI CURIAE

—

_ Srmon, H. RirKrnp,

Aprian W. DeWrnp,

_ James, B. Leyis, .

‘ 345 Park \Avenue,

New York,\N. Y.: 10022.

PauL, Weiss, RirKrxp, |

Wuarton & GaRbisoN,

Maurice Austin,

Of Counsel: :

January 21, 1972 |

PRAQS ONY

War ARS ane Wage dy ida: a

Interest of the Amici Curiae ....

. Summary of Argument a:

- Argunient: ° |

"INDEX

I. Reserved managerial o or administrative powers

~ _b. The rule developed in the court decisions ©

over property transferred in trust during life,

including power to vote trustéed stock, do not

. Subject the transferred property to estate tax

a. This rule is established by a long line of

decisions of this Court and the lower courts

applies in. the instant case

_ The decedent did not reserve the enjoyment of

‘the. transferred stock

. oe income tax decision of Commissioner: v.

PAGE

ao)

Sunnen, 333. U. S. 591 (1948), on which the -

Government Felies, ° is legally and factually

inapposite ........... oon

Conelusion .......--.-. mat sachets

19°

. This case calls for applieation of the Abetrine |

of stare decisis =e lecoane

11,

CITATIONS |-

<a vf © page

In re Barrows’ Will, 123 N.Y.S. 24 501 {Suarr.. Ct.

Monroe Co. 1953) -....... 14.

- Becker v.- St. “Louis Union Trust Co. 296 US. (48 :

(1935) .. 2s, | 25

Burnet 7, Northern es rust Co, 283 U. S, 282

(19381) , hstatanavnsrtba keene -..24, 26

City Bank Farmérs Trust Co. v. Hewitt Realty Co., 7

| 27 N.Y. 62, 117 N.E. 309 (Ct. App. 1931) i414

: Commissioner v. Estate of Church, 335 U.S. 632

(1949) |... ee, SE ONCE TO 6,7, 10, 20, 24, 26.

Commissioner v. Douglass’ Estate, 143 Sd 941 (3d. -

‘Cir. 1944) -: 24

Commissioner v. Estate of. Field, 324 US. 137 |

9 | Jy pei cena LENE MERE Se Set OONenaN NTS .... 24, 25

Commissioner v. Prouty, 115 F.2d 331 (lst Cir. ;

1940) , 21

_ Commissioner v. ‘Sunnen, 333 U.S. 591 (1948). ices 4, 1. 21.

‘Commissioner Vv. Tower, 327 USS. 280 (1946) wr «19.

Commissioner v..Wilson’s Estate 181 F. 2d 145 (3d

Cir. 1951) -....: 8,10

Delaney v. Gardner, 204 F.2d 855 (1st Cir. 1953) . 20 -

Dodge v. Ford Motor Co., 204 Mich. 459, 170 NW. x

668 (S. Ct. 1919)... 5

-. George C- Doerschuck, 17 B.T.A. 1128 (1929) : icinki . 47, 22.

Estate of Laura B. Alexander, 2 CCH T. CM. 1156.. --.

* (1943) 9, 10

Estate of Edward Lathrop Ballard, 47 B.T.A. 784

(1942), aff’d 138 F.2d 512 (2d.Cir. 1943) 20

. . Estate of William L, Belknap, 10 CCH id .C.M. 769

(IBA) zt, 17, 22

Estate of Edward E. Bradley, " T.C: 518 (1943),

on, 140 F.2d 87 (2d mis 1944) .. ve

. * 5

= Pe aah ear a

| Estate of Ralph Budd, 49 T.C. 468 (1968) .......... 8, 10

Ftitte of | George. H. Burr, 4 CCH T.C.M. a ees

(1945) ..... 90

Estate of Bayard Dominich, 4 €CH T.C.M. "296

- (1945) (supplemental opinion), aff’d as to other

. tssues, 152 F.2d 843 (2d Cir. 1946) = 9,10

Estate of Henry S. Downe, 2 T.€. 967 (1943). - ao 10,00

_- Estate of Ford v. Commissioner, 450- F.2d 878 (2d * .

a ee Re. 8, 10

Estate of Frederick 8. Fish, 45 B. TA. 120 (1941) 20

Estate of George F. Fiske, 5 5. CCH T.C.M. 42 (1946): 9, 10

Estate of James H. Graham, 46 T.C..415 (1966) es ae

Estate of George W. Hall, 6 T.C. 933 (1946) ...... 1. A;10_

‘Estate of William F. Hoff ord,4'T.C. 790 (1945) __.. 9,16,

) | 17, 99

' Estate of Herbert L. Johnston, 2 here TCM.299 .°-*..

- + (1943) sihadssgahn’ Dy BO *

Estate fs Willard V. King, 37 T. C. 73 (1962) ooh a. 9, 10,

"49, 22, 93

Estate of B. H. Kroger, 2 CCH TOM. 644 (1943), 6

aff'd as to other issues, 145 F.2d ‘901 a Cir. |

.. 1944) .. 9,10

- Estate of Samuel 8. Lindsay, 2 T. C. 174 (1943). rs is | aes

‘Estate - of Maurice Markson,, 3 CCH T.C.M. 309

(1944) sida! SED

- Estate of Benjamin Paschal O'Neal, 6 CCH TC. M |

cs wee te 7 sanctus Ey Ey a

_ Estate of Marvin L. Pardee, 49 T.C. 140 (1967) ........ 8,10 - |

. Estate of Aline Peters Peters, T.C. Memo 1964-167 9, 10 »

Estate - of Walter B. Roddenberry, Sr., : CCH chee ie

- T.C.M. 781 (1949) ....: 20

Estate of Alexander K. Sessoms, 8 ‘CCH TOM. ote Ee

_ 1056 (1949) | a

Estate of Spiegel v. Commissioner, $35 UW.

(1949) . ~ 6,7, 10,20, 24,25.

Estate of Louis Stouert, 4 CCH T.C.M. 59 (1945)... 20 ©

Estate of Pierre Jay Wurts, T.C. Memo 1960- 102 .. ie 10

Fidelity-Philadelphia Trust Co. v: ‘Rothensies,. eee

U.S. 108 (1945) - 24, 25

“¢ Goldstone v. United States, 325 U. g, 687 (1945) ........24, 25

: Gottfried v. Gottfried, 73 N.Y. S. 2d 692 oe Ct. N.Y. :

"PAGE *

Co. 1947).......... , -

“Harrison v. Schaffner, 312 U.S. 579: (1941) eibbening ‘: 2

Hassett v. Welch, 303 U.S. 303 (1938) - 26

Helvering v. Clifford, 309° U.S. 331 (1940) - eas 19, 20,21

. Helvering v. Duke, 290 U.S. 591 (1933) . len Mees

Helvering v. ‘Eubank, 311 U.S. 122 (1940) skipinninsly

Helvering v. Hallock, 309 U.S. 106 (1940) dito lage (25°

Helvering v. Horst, 311 U.S. 112 (1940) .. 19

Helvering v. Safe Deposit & Trust Co\, 316 U. S. Oo :

(1942) . ian

Helvering v. pt. Louis Vuléa Trust Co ‘\z06 U. S. eee

Gene (1935) 25

Higgins Macduiisonse: 129 F.2d oe Cir. a0 eae

1942), cert. denied, 317 U.S. 658 . Be re

Neon v. Public Industrials Corp. . 144 F. od 968 ( seas

‘Gir. 1944) 1 15

Mayv. Heiner; 281 US. 238 (1930) me , 24, 6.

x - Pamel D. Holland, 47 B.S. A. 807 (1942) recon-

> sidered; 1) TC. 564 (1943) . 17

| Jones. v. Missouri-Edison Flee. Co:, 144 Fed. ee a

(8th Cir. 1906) . ca : 8B

. Kavanaugh v. Kavanaugh Knitting Co., 226, N.Y.

185, 123 N.E..148 (Ct. App. 1919). -...... oe ae

Kullgren v. Navy Gas & Supply Co., 110 Colo: 454, ,

1% P.2d 1007 (S. et. 1943) ........ pig “18

Lusthaus y. Cémmissioner, 327 U. S. 293 (1946) . eM 19

| McCormick v. Burnet, 283. US: 784 orca Re 6, 10, 24, 26

. ere :

‘

. . ie 4

. . ‘

;

: McNab v. McNab & Harlin inhoc Co., 62 Hun 18, 16

N.Y.S. 448 (S. Ct. 1st Dept. 1891), aff’d, 133 N-Y.

_- 687, 31 N.E. 627 (Ct. App. 1892) 14

Michigan Trust Co. v. Kavanagh, 137 F. Supp.

(E.D, Mich. 1955) .. 2

. Morsman y..Burnet, 283 U.S. 783 (1931) ni 24, 26” ;

‘ Nauss v. Nauss Bros. Co., 195 App. Div. 318, 187 ,

NYS. 158 (App. Div. Ist Deer ial Beromt a ee

: ‘Old Colony Trust Co. ve United States, 493 F. 1 601 ate.

"(Ist Cir..1970): 2 cd 8,10

_ Patton v. Nicholas, 154 Tex. 385, 279 Sw. 2d 848 .

- ($. Ct. 1955) “ . te

_ Pepper v. Litton, 308 U.S. 295 (1939) ‘ a Oe

: Reinecke v. Northern Trust Co., 278 U. S. 339 (1929). 4, 5; i

cbs ee 7,10, 11, 12, 20, la

mi 22,98, 24, 25 -

Soins Vv. Hill, 289 US. 582. (1933) . mimo ye Yj

Selama: ‘Dindings Plantations, Ltd. v. Dishes: 216

_F.Supp.,104 (S.D. Ohio 1963), aff'd, 337 F.2d 949

“(6th Cir. 1964) .... ae

State v. Witmore, 126 Ohio St. 381, 185 NE. 547. git

(S. Ct. 1933) . 13°

‘State Street Trust Co. v. United States, 263 F.2d

PAGE

* 635 (1st Cir. 1959) Se

Thomas v. Matthews: 94. Ohio St - 113 NE. 669 ae

(S. Ct, 1916) -.. : 13

* ‘Veited States x. oe 376 F.2d 65.(10th Cir. 1967) rae

United States vi Powell, 307 F.2d 821 (10th 3

> 4962): = i ie 8,10

Lillian M. Wheeler, 20 B.T.A. 695 (1930) 242 310

~ Feazel v. Coyle, 68-1 USL. 12,624 (ND. TL.

: 1968) . | ; iB, 10, 16

aaa vi * \ /

Jt ee ‘ a

| 0 #/ Pade

es \Unteh nal Rev enue Code of 1954, section 61 sienareosint j. - +A

Mai ha rrnal Revensé Cogle of 1954, section 2036 . om aa er 4 :

ae 25, 26

A }

ee ternal Rev enue Code of. 1954, ea 2036(a) (1). . ee

n . Internal Revenite Code “of. 1954, — 2036(a)(2) -

+o SS .. 3,7,9,10

h ai Revenue Code of 1954, section 2037 (a), ie 26.

: Interna Revenue Code of 1954, section 2038 |... - 10.

2 Sata Revenue Code of 1939, section-22(a) ..._ | 19

. Internal Rev enue Code. of 1939, section Sl1fe) . si co

Joint. Resolution 529 of March 3, 1981 -......: ea ae

_ Revenue Act of 1932, section 803(a) vee AONE 24

_ Revenue,Act of 1924, section 302d). And (hy. adie oe

a ben Rea i Technical Chaniges Act of 1943; section 207 :..... ree, ae

: ee ges “tpedhnieal Changes Act of 1949, sections 7 and 8 224, 26

| ‘Technical Changes Act of 1953, section 207 . oe

‘Baker ‘and ies: Cases: sod Materials on | Corpora —

“tions (3d ed. 1959) atoy. ee

a (rev. ed. 1946) . sul a

~ Brief’ on reargument for Commissioner of Internal ©

- Revenue in. Commissioner v. Estate. of Chava

and Estate of ‘Spiegel v. Commissioner, Supreme 3

~ Court, Oct. ‘Term, 1948 ......... ‘ 7: ma 7,20 .

eee Dewind, The Approaching Shinkai m Federal Bstate sg

i and Gift, Taxation, 38 Calif. L. Rev, 79 (1950). Couseen os

e Federal Estate and Gift. Taxes, A Proposal for Inte-.

gration and for Corrdation with the Income Taz, ’

~ United States ‘Goverment ‘cei ‘Cee, sis

' s PAGE

Fletcher, Cyclopedia Corporations (perm. ed. 1967,

1971). ‘ pale

‘ Journal Suprashe Court, Oct. ‘Term, 1947 vocenepnnenee ee

* ON eal, Close Cor porations (1958 ed. + 13,18

O’Neal’ and’ Derwin,. Expulsion or Oppression of

. Business, a | “Squeeze Outs” in leemeae

_ Enterprises. (1961) .. ei ence Ag 18 er

Rev. Rul..67-54, 19671 CB. IP shinrcndiaicuieicicne FSS

-— The Tax: nee (1968) See aA 93

IN. THE,

| | Suen Court nf the United States

OCTOBER TERM, 1971.

No. 71-308

UNITED STATES OF AMERICA, ©

“4 wa - Petitioner,

vu.

Manta A. Bree, Executrix Under the Last Will

and Testament of MILLIKEN C. Byrum, Deceased,

. Respondent.

ON WRIT ‘OF CERTIORARI. TO THE UNITED STATES

COURT OF APPEALS FOR THE SIXTH CIRCUIT

_ BRIEF OF HOWARD GILMAN, CHARLES GILMAN; JR.

AND SYLVIA P. GILMAN, EXECUTORS OF THE WILL - ;

. OF CHARLES GILMAN, DECEASED, AS AMICI CURIAE

This brief in support of Respondent’ s position is sub-_

mitted with the written consent of counsel to both parties |

_. filed with the ee of the Court.

Interest of the Amici Curiae

Rs The amici curiae are the executors of the will of Charles

| Gilman (the “Decedent”), a New York resident who died —

in 1967. The Commissioner of Internal Revenue (the “Com-

missioner”), has proposed a deficiency of several million -

iia

PRP RR aeRO SENT AThin,

ROE SS Sa Ss SPOR nee 2

. :

. .

CARON ASC NPR SOT Ds EN AMR CN OA aie ene

: 4 , se

perkoyry teneacteoen

‘@

2. ; | . +

dollars in the estate tax liability of the Decedent’s estate by

including in the gross estate the alleged value ofthe assets

_ of an inter vivos trust (the “Trust”) created by the Dece-

dent in 1948. The Executors having protested the proposed

deficiency, the Commissioner i is preparing to issue a statu-—

‘tory notice of deéficiency...“The Executors intend, upon

receipt ‘of the notice, to petition the* United States ‘Tax

Court for review of the deficiency.

‘The relevant facts with respect to the Trust as of the time .

of the Decedent’s death may be briefly summarized. The

- Decedent had no beneficial interest in the Trist; his ‘two ©

adult sons were to receive the income for life and, upon the

‘death of. the survivor of them, the remainder was distrib:

utable to their issue. The Trust was irrev ocable; moreover,

_ it fixed beyond amendment the disposition of its inconie and -

- €orpus and the time of its termination. The Trustees (the

_ Decedent and two other individuals) could act by majority aed

vote. They were authorized to sell any assets of the Trust

‘ and- to reinvest the proceeds, without being confined’ to

investments of the kind prescribed by law.. The Trust assets

consisted -of: six shares of common stock of” Gilman Paper

Campany (the “Company”), a New Hampshire corporation, re

" which were the only outstanding shares of that class and

the only voting shares. The Company also had outstanding -

5,262 shares of nonvoting participating preferred stock, of |

which 5,000 were owned by the Decedent. The Decedent

-was President and one of the three directors of the Com-

The Commissioner aaett that the stock of the Company .

held by the Trust i is includible i in the Deeedent’s gross estate

solely because the Decedent, as one of the three Trustees,

could abn ea in the oe. of that stock. . * 3)

‘Saees of Kegan

ee ‘managerial and administrative powers’ over

property transferred in trust during life, including power

. to vote trusteed stock, do not subject the transferred prop-.

_ erty to estate tax. That rule is established by 28 decisions —

‘of this Court and the lower courts spanning a period of.

over 40 years; no court holds to the contrary. These -

decisions uniformly distinguish managerial and admini- -

strative powers over transferred property from the power.

“to designate the persons who shall possess or enjoy the

property or the income therefrom” embraced by. section .

-2036(a) (2) of the Internal Reveriue Code. These decisions

apply irrespective of whether the deceased settlor reserved —

the power as trustee or in his individual capacity.

The principles of those decisions apply to the transfer by

a controlling stockholder of shares of his stock in trust with

reservation of power to vote the trusteed shares and fo

prevent their sale. “7

The Government’s arguinent that estate ne liability j is ere-

ated by the decedent’s allered power to make the trusteed . °

_ stock dividend- paying or non-dividend-paying. proves too

‘much, By the same token, all of the 28 decisions we have -

mentioned were wrongly decided, since each settlor could |

have designated who should enjoy income by arbitrarily

investing in inecome- producing or mies saeeinae-Dregecing 2

‘- stocks or other property. |

+ he decedent’s control over the corporations coupled did

not give him a power over enjoyment of the trusteed prop.

erty or income within the meaning of section 2036( a)(2),

for a controlling stockholder or a director is a fiduciary.

While directors ppssess a range of business discretion in

setting dividends; courts will intervene if’ dividend policy

is dictated by non-corporate considerations, As a corpo-

- Tate fiduciary, the decedent's discretion was subject to.

. i

SAA IE

GE LRRD

rere Svar a a

eer .

external standinnde cntorecabin’ in a court of acai, so that

_. his powers were no greater than the managerial or admin- »

istrative powers that a settlor-trustee may reserve without

———— estate taxati 2

' The .decedent’s: AE COE through: in board: of

direbtuts, to maintain himself in corporate employment and

to be compensated therefor was not a reservation of enjoy-

* ment of the ‘stock transferred i in triist. As the Tax Court

has held, the right or opportunity to draw a reasonable sal-

ary from a corporation does. not amount to retained. enjoy:

ment -of transferred stock within ‘the meaning, of section

2036(a)(1) of the Internal Revenue. Code. A. reasonable

salary is earned; its quid pro quo is the services rendered.

The siendends of fiduciary obligation that cireumscribe ©

-. corporate dividend policies also cireumscribe corporate sal-

. ary policies.“ A controlling stockholder may not vote him-

: self, or cause himself to be voted, an excessive salary. The:

enjoyment of a minority stock interest in a corporation is

the prerogative of its owner, and may not legally be usurped °

_ by the a stockholder desc oe abuse of a “e

office. ~. !

+ The income tax destin of Comthissiones- v. Sunnen; 333°

U.S. 591 (1948), on which the Government relies, is legally .

_inapposite to the estate tax. Decisions of this Court and

*’ the lower courts clearly establish the lack of correlation he-

tween the income-and estate taxes in the field of incomplete

.transfers. Sunnen is also factually irrelevant, since the —

taxpayer i in that case retained important controls arene

to his status as edntrolling stockholder. .

- This case calls ‘for. application of the doetrine of stare

“ decisis. The principle the Government here seeks to over-

‘turn was established in’ a 1929 decision: of this -Court, ©

. Reinecke v. Northern Trust Co., 278 U.S. 339 ( 1929), which

| the Government has not satisfactorily distinguished. The .

i ‘erosion of that principle oer by the, Govurtiunaeet here

would open to taxation an indeterminate—perhaps broad ©

' .—eategory of trusts: long regarded as nontaxable. If the.

_Governrftent is discontented with the present long-estab- .

lished rule, it should address itself to the Congress. a ee

should not succeed in its request ‘to this Court for retro-

active reversal in disregard of stare decisis at this late date.

ARGUMENT -—

| S. |

Reserved ‘managerial or ndihinisibaiive powers over —

property transferred in trust during life, including

power to vote trusteed stock, do not ne the trans-

“s ferred property to estate tax. :

The Federal estate tax statute has, fron the date of its a

: original enactment in 1916, , attetnpted. to forestall tax avoid-

ance “by including in the measure of the gross estate cer-

- tain incomplete lifetime. transférs of property that are

regarded as substitutes for testamentary dispositions. For Me ks

55 ‘years interpretation. of the incomplete lifetime transfer

_ provisions has vexed the administrators and ‘the courts.

However, within: the kaleidoscopic pattern of the court

decisions; on one proposition there is accord: Reserved *

‘managerial or administrative powers over pfoperty trans-

ferred i in trust during life, inelnding power to vote trusteed

stock, do not subject ~ transferred: pisicated to estate’ tax.

’

a. This rule is clita by a long line of deci-

* _ sions of this Court and the lower courts, — ce

The story begins. with Reinecke v. NV. orthern Trust Co. , 208

U.S. 339 (1929), in which one question was whether the.

7 assets of five inter vivos trusts. should be included in the ©

gross estate of the deceased settlor, who was not a trustee,

. because of his reservation in his- individual capacity of -

powers “to supervise the reiny estment of trust funds, to

Tequire the trustee to execute proxies to his nominee, to v ote |

any shares of stock held by the trustee, to contre all leases

executed by the trustee, and to appoint successor trustees,

278 U.S. at 344. Holding that the five trusts were not sub- ies

ject to estate t ax, this Court said: as

“Nor- ‘did the, viskrved powers of management of

the trusts save to decedent: any~-.control over the

-economic benefits or. the enjoyment of the property.

- He would equally have réserved all these powers and

others had he made himself tlie trustee, but the trans-

' fer-would not for that reason have been incomplete.

. The shifting of the economie interest ii the trust

property which was the subject of the tax was thus:

complete as soon as the trust was made... . [T]he

_Teserved powers do not serve to distinguish {the

_ trusts] from any other sift infer vir os not subject to. :

the tax.” Id. at 346-347. a . .

In 19: 1 and again in 1933 3 this Court aes to the above- —

‘ deseri ed holding.' Still later, in 1948, this Court sya sponte/.-

invited: reargument of the question, Commissioner ee

Estate of Church; 335 U.S. 632 (1949) ; Estate of Spiegel v. 2

Commissioner, 339 U.S. 701 (1949). The decedent in each

-of those two cases had niade a lifetime transfer of property .

to himself and’ ‘another- person or persons as trustees and .

had conferred on the trustees broad managerial and ‘ad-

1. (1) McCormick v. Burnet, 283 U.S. 784 (1931), a per curiam

reversal of a decision of the Seventh Circuit that had found support -

for taxability of an inter vivos trust in the deceased settlor’ reserva-

tion of power to make investment decisions. 43 F.2d

( 2). Helvering Duke, 290 U. C391 (1933), a per curiam affir-

mance by arr ually divided Court of a Third Circuit decision for ©

the taxpayer, in which this Court received extensive argument from

_the Government, that the trust was taxable because the deceased set- -

’ tlor had retained. managerial pores as trustee.

. “2 : .

- gerial powers. “age ‘s oe eee |

' Understandably, therefore, every lower court: that has °

_ considered the estate tax classification of mariager(al or

ministrative powers ; moreover, the decedent in Church had

reserved in his individual capacity the power to control in-

_ vestment of thé trust assets. 335 U.S. at 691-692, note 1; 736, ;

After argument and consideration of the. two cases at the.

October 1947 Term, this Court entered an order: réstoring

them to the docket ‘and requesting. counsel upon reargument

to diseuss particularly nine questions, including the. follow-

ing: * sd : ee fee eee oe

. .- -“6.° Under — section ‘811(e) [of .the- -Internal |

Revenue Code of 1939, the predecessor: of section

2036 of the Intérnal Revenue Code of 1954] is the

‘possession and enjoyment? of the corpus of an inter

_vivos trust ‘intended to take effect * * * at or after’

the settlor’s death, where he names’ himself. as co-

.trustee with the bread control and administrative .

‘powers over the corpus and income here vested, and

where the corpus is-withheld from the beneficiaries

‘until the -settlor’s death?” Journal ‘Supreme Court,

Oct. Term, 1947, pp. 297-298; 335 U.S. at 717, note 5.

n its Church and Spiegel decisions, this Court answered the

: s ae take / « riage Se ay . . -¢

above question negatively by not, overruling or modifying

its Northern Trust holding- with respect to‘ reserved mana-

; . a ° | te i

admfnistrative powers in recent years holds them not to be

classifiable with the taxable powers over beneficial enjoy-

- “ment ‘described in- section 2036(a)(2) of the Internal

2 2.. The Government, responded in its brief on ‘reargument : by-

"conceding that the Northern Trust case.had rejected as immaterial the

settlor’s resetvell powers of management and by stating: “While we

hesitate to suggest that the Northern Trust case should be disapproved

‘--on this ground alone, we’ think that this. ground, coupled with the

general basic considerations discussed above [i.¢., that the decedent’s -

_ life measured the duration of the trust and-that there was a remote

MB ee

possibility that the property would reyert to him] may-appropriately __.

call for reexamination of that case.” Gov’t brief on reargument, pp. -

rex

Revenue Code. : Particularly ‘noteworthy ‘is: Old Colony’

Trust Co. v. United States, 423 F.2d 601 (1st Cir. 1970), in

which the First Circuit expressly rejected the Goyernment’s

argument: that the settlor-trustee’s broad a istrative

and management poweTs were a ground for estate taxation

and, in doing so, expressly repudiated | its much-criticized

>. dedision in State Street Trust Co..v. United States, 263 F.2d

635 (1st Cir. 1959). The First Cireuit said in Old ‘Colon, y: :

: “We hold: that no aggregation of purely administrative

powers can meet the gov ernment’s amorphous test of “suf-

ficient dominion and control’ so as to be equated. with owner:

ship.” 423 F. 2d at 603, oes gore eS

Four other Cireuits, a District: Court ind the-Tax Court a

- concur in this view: (1) The Sécond and Third: Circuits i in

- per. curtam: affirmances. of Tax Court decisions; F the Sixth. - 4

5 Cireuit in the decision below; the Tenth Circuit in United

States v. Powell, 307 F.2d 821 (10th Cir. 1962), i in which the

: “court said “We conclude the inv estment power given to the

' trustees [the deceased settlor and a: trust company] by the

‘trust instrument. w as subject to and limited by a judicially

‘established and judicially enforceable. external and ascer-

tainable standard and, hence, was no; imore than a manage-

ment or administrative power” (307 F.2d at 826) ; the Dis- -

". triet Court for the Northern District of Tilinois in ‘Yeazet v.

Coyle, 68-1 U.S.T.C. 912,524 (N.D. Ti. 1968), involving a

deceased president: and sole shareholder of: a corporation

-who had transferred approximately 60 percent of the stock

to herself ‘as trustee, retaining the remaining 40. percent;

and the Tax Court in an unbroken series of 19 decisions.*

3. - Estate of: Ford v.'C ommissioner,.450.F.2d 878, (2d Cir. 1971),

"-- aff’g: per curiam 53 T.C. 114 (1969}> Commissioner v. Wilson's _

Estate, 187 F.2d 145 (3d Cir. 30), aff'g per curiam 13 TAC. 869

(1949). |

‘The two dudsicts chiet | in note 3, supra, and the Silke:

state of Ralph Budd, 49 T.C, ‘468 (1968); Estate of Marvin L.

ie es 49 T.C: 140. (1967 ); Estate of James H.. Graham, 46 °T.C.

- 415 (1966); Co of ——? V. King, 37 T.C. 973 (B62); Estate

ee the most fully-reasoned ‘of the 19 Tax Court ieee. es

" Estate of Willard V. King, the.trust. indenture made by the

decedent provided, that trust principal might be invested in:

P ne . any type of property, even though. speculative, extrahaz-

\ardous or unproductive, and that the trustee should exer-

cise the - rights of management and investment only in.ac-

cordance with the decedent’s ‘directions. "Fhe Tax Court

concluded as follows: —

“—Wle think that althougt the dioeduak; SP ible

broad discretionary powers with respect to inv est-

. ment, might invest in properties producing either a

. high o? a low return of income, such powers would.

have to be exercised in good faith in accordance with

his. fiduciary responsibility‘and could: not be psed for.

the purpose of attempting to favor any beneficiary |

. of class of beneficiaries to the detriment of the other

a ‘beneficiaries. It is our conclusion that the right re-

_ tained by the grantor was not the right to designate,

ae * -the persons who should possess-or ‘enjoy the prop-\,

f erty or the income therefrom within the intendment ;

of Section. 2036 (a) (2).” ” FF iy! C. at 980.

- Analysis. of the 28 ‘eating cited ‘and discussed pe

‘demonstrates the breadth and vitality of the. principle the

' Government here seeks to overthrow. The decisions are by |

eight courts, spanning a period of 42 years, and no court

holds. to the contrary. The trusts in these cases involved

vo George. W.- Hall, 6 T:C. 933 (1946); “Estate of William F. Hof:

-- 1° ford, 4 T.C. 790 (1945), modifying 4 T.C. 542; Estate of Henry S.

Downe, 2 T.C: 967 (1943); Lilkan M: Wheeler, 20 B.T.A. 695

. (1930); Estate of Aline Peters Peters, T.C. Memo 1964-67; Estate of

Pierre Jay Wurts, T.C..Memo. 1960-102; Estate of Benjamin Paschal’

‘O’Neéal, 6. CCH T.C.M. 713 (1947); Estate of George F. Fiske, 5

COC T.C.M. ‘42 (1946); Estate of Bayard Dominick, 4 CCH

~, TCM} 226’ (1945) (su gm opinion), aff'd as to other i issues,

ee 843 (2d Cir. 1946); Estate of Maurice Markson, 3:CCH

T.C.M. 309 (1944); Estate of Laura B: Alexander,.2 CGH. T cM.

1156 (1943); Estate of B:.H. Kroger, 2 CCH T.C.M. 644 (1943),

- aff'd as to other issues, .145-F.2d 901 (6th Cir. 1944); mad of .

ne eres pi — 2 CCH T.C.M. Cite (1943).

‘

aia

4 A

' - ” Varied~ypes , of pecipnorty, beckoding mailiolohle securities,

-Feal estate alte tocks. of closely-held corporations. “Tn all>

‘ powers.over the trust prope

- vestment powers in 8 of the eases a e trustee® and in Fie

‘of the, eases as cotrustee with ‘another perso r_perso sf 3

of the 28 cases the’ ceased settlor had ‘broad investment

TR decedent held the in-

wy In the: remaining 14 eases the decedent was nota trustee; but

a had: reserved in his indiv idual capacity the right'to make —

the investment decisions ' for the trust.” -In 20-of the’ oS

> with another person, to vote any stocks held by the trust.*- —

eases thes decedent had the’ rights: ‘alone or in conjunction

We have dealt at considerable length with this unfform

and ; massive body of decisions because of the Government’s E :

ox attempt to dispose of the Northern Trust holding with re--

speet to‘ managerial pow ers on the ground that. the: case

antedated the 1931-32 reeasting of what is now section 2036 Ree

- of the Intern: al Revente Code? Pet. Br. 18-19. That hold-

ing has received too much post-1932. reaffirmance .and sup- :

port to be vulnerablé to the Gov. ernment’s charge.

5. Duke,. Ford, Yeasd, Pardee, W heeler, Peters,. Fiske ( there

- waga cotrustee, but-the settlor’s decisions, were to prev ail i in the ev ent tee

* of disagreement) ahd Markson. ;

6. Spiegel, Old Colony, Powell, Budd vo to ‘one > trust: as to-the |

. other trust the settlor reserved the power. to remove -_ replace the:

trustee), Graham and Hofford.

. 7. Northern Trust, McCormick, Church (who, ditcouate a — ‘

trustee, reserved.the investment powers in his individual capacity),

Wilson, King, Hall,. Downe, Wurts, O’Neal, Dominick, Alexander,

Kroger, Fapnston. and the.case below “(hereinafter Byrum). ‘es

8. Cases cited in — 5 and 6, supra, and Northern Trust,

McCormick, Church, Byrum, King-and Downe, .

ie Government also says that Northern Trust: arose before :

the 1924 enactment: of the “predecessor of the present section 2038. -

-°The Government’s statement is irrelevant, since itis not relying on —

section 2038 in seeking reversal of:the decision below.~ Moreover, its

statement is inaccurate, since the 1924 enactment was made five years

~ before the Northern Trust. decision and was expressly made retro-- ~

. active. ; Seven Act of 1924, section 302(4) and (h). P

o.*. ¢ . . ’

. . D.

aon ‘ e-

‘ «“s : - ae - a aA ; nee

Le. Thee vals diiunias in the éourt lal ‘applies ;

‘. in the instant « nae ake ate

The Government, while acknow ledging. the existeas ar

the: general rule requiring, impartiality. in fhe exercise of be

managerial powers by a fiduciary, argues that the rulé does

ie not apply’ to trusts of closely-held stock where, as here, the

. déceased: settlor was the controlling stockholder and could —

~>prevent sale of the trusteed stock. \ Pet. Br. 15-16, 19- 20.

.The Government urges" that stich a settlor could, being - “+

- unconfined by” fiduciary: restraints, exercise control of divi-

‘dend policy through ‘the board of directors and thus eae oe

‘ : | late the. flow of i income to the trust. Pét. Br. 14-15,. 19.

. 25 Undér' that argument, ‘the trust: in each of. “the. other 27°.

estate tax cases we have vited (pp. 5-10; supra) was taxable

The Government’s argument that the trust is ‘cebenbel =

by section 2036 (a) (2) beeguse of the: decedent's. alleged

‘power to make: the. trusteed stock’ div idend- -pay ing or non-

dividend-paying (Pet.. Br. 15-16, 19- 20) proves: too much.

* becansé the-settlor could. have invested, or directed the . |

4 trustee to invest, the trust Corpus in dividend- -paying. stocks :

wae oF in non-dividend-paying ‘stocks or in.other jncome-produe- fo

‘ing or non-income producing property. The Government’s

‘ analysis obviously carnot be squared with. Northern Trust "

and its numerous progeny, thé teaching of which clearly i is ©

- that the power to vary the flow of income thngagh mana-

gerial.or administrative’ decisions is just not the type of .

- power reached by. section 2036(a) (2). In arguing that the -

- -rule of law developed i in the-cases involving individually ° .

_.Tetained investment powers over security portfolios does

not eontrol here, the. Governmént is creating a semantic dis- ;

tinction Without a real differ&ce. : a

he Government also asserts that “the ‘chet not bs -

_ ing a trustee, the general rule requiring impartiality Y no

application. ‘Pet. Br. 19. However, as we have shown

° me he aw .

: o. .

2 : . ° - a ee et

x , che: Yt “ <2 il

Te (note 7,‘ supra,: _and accompanying. text), Byrum is one of |

+ 14 estate-tax eases, including this - Court’s landmark

.- Northern Trust. case, in which ‘the ‘settlor of an inter vivos —

trust retained. management powers in-his: individual capacs, ° -

ity, including: ‘the power to direct. the teust’s onion

‘policy. Each of the other 13 settlors, like ‘the deeed

could. veto sales’ of trust property. Th all 14 cases ;

courts held that the decedent ‘had not. retained a tax-produc-

. ‘ing power. ~ JAs the | "Tax Court: said in King, supr2, the™

: ereator of a trust who. names another as trustee and’ |:

“.reserves in his individual capacity. the right to ‘direct the z

trustee’: s:exercise of investment and voting’ powers has “in

effect made himself a fiduciary” and is “not at liberty to

_ . administer the trust for his own benefit er to ignore the

' rights of the beneficiaries. * 37 T. C. at 980. Under this line

- of décisions, ‘Tetained management . pow ers are net made.

* tax-producing by the. fact. that they are ee otherwise

than in the office of trustee. .

> We now turn to-the principal vice of the Gov itenent! =

_ argument—its assertion that controlling stockholders and

‘directors are not confined by: fiduciary obligations. Pet.

Br. 14-20. As* this Court said in Pepper -v. Litton, 308 U-S. ~

. 295; 306 (1939); “A director is a fiduciary. .... So isa

_ dominant’ ‘or controlling | stockholder or wroag “of stock-

‘holders... - Their. powers are powers in trust. » The same :

principle lias ‘been stated often, for example, i in K ullgren v.

stockholders of -a _ corporation, and the ce ereen itself,

law governing the obligations of fiduciaries i ap applicable we

them. 999. :

These are ainka: -principles of sifted common Taw, not

turning on the construction “of a particular corporate

_- ‘Navy Gas & Supply Co., 110 Colo. 454, 135 P. 2d 1007; 1010 -

- (S$. Ct. 1943), “The relation which directors bear to the -—

as ‘universally conceded... i8 a fiduciary one;’ and ‘ ‘The .

’ statute” nor dependent on the presence of, pub ¢ securit

_ holders... O’Neal, ‘tlie leading ‘commentator-Sn_ the. law of

» ~~ dosél -held.-corporations, in. his. treatise Close Corpora-

/ tions (1958 ed.) summarizes the applieable law as follows: ;|

A See te

_ “As was said by: the Courtof Appeals of New York *

_ - [Kavanaugh v. Kavanaugh Knitting Co., 2267 Mud. =

185, 123 N.E: 148 (1919) at pp. 151-152], wheneyer

a number of stockholders ‘constitute themsely:

Lk _-are by the law constituted, the managers of ¢or

oi . affairs or interests, they stand in. much the. ?

_*. tude toward the other or quinority stockholders that |

the directors sustain generally-toward all, the stock. -

holders, and the law requires of them the utmost

_, 800d ‘faith’, arid .a- court of equity ‘will protect a |

" minority: stockholder against the acts-or. threatened ..

. acts’of the board of directors ‘or.managing stock-

_ holders of the corporation which violate the fiduciary —

+s.’ «relation and are directly injurious .to the stock-

_. .. * holders’. And; as a federal court has said, [Jones v.

; Missouri-Edison Elec. Co,, 144 Fed. 765, 771 ( 8th Cir. -

ee - 1906)], majority ‘shareholders ‘owe to the minority

the duty to exercise good’ faith, care and diligence

to make the property of the corporation in their

_-. @harge produce the largest possible amount, to pro-.

- tpet-the: interests of. the holders of the minority of |

__ the stock and to secure and deliver to them their just

proportion of the income and of the proceeds of the

rr eee 3 3 7

a WORD etp 4646 ks

There is no doubt that corppeate direetors possess a 7

¢ — wide range of business discretion in setting dividends and

that courts are consistently and properly reluctant to sub- —

ee ee . its ao

1963), aff'd, 337 F.2d 949 (6th Cir. 1964): State v, Witmore, 126°0 °

+ Qhio-St.°381, 185 N-E. 547 -(S. Ct. 1933); Thomas v. Matthews, 94 *

_—'s Ohio St. 32, 113 N.E. 669°(S: Ct. 1916). ae ae

- . pee ig s -

. ; . ra 4 - . “i

~ ———e \ e . é ae .

= pe 5 . : ° . es

Be. ‘ 3 hoon ’ e¥ yer ‘ . Z . <tcant

- * - - .

AS Sioa :

| There i is. no doubt either, howey er, that it is business judg- Tye

: , ment only that is deferr ed’ to and that a. dividend policy -

a desire ta Postpone current income ‘in’ favor of trust re-

| ‘remiaindermen.

- tretion’ of -the ‘board of directors in this regard is not

o #The principle to be applied is that which shall secure os

it, and provides. an occasion for judiciab. intervention "at

‘the behest .of minority shareltolders.. The same would be ~

‘true of an "excessive e Wench policy motivated by the

\directors are not a law. unto themselves@and there is some

. limit to their right to husband \the finances of the company

and reinvest the profits, or to put them back into better- ~

448, 449 (S. Ct. ist Dept. 1891), aff'd, 133 N.Y. 687, 31 NE.

Tt Ct. App. 1892).° “The essential test of bad faith is to

-deterinime whether the policy 6f the directors is dictated .

glee cs by ‘their personal interests. rather than. the corporate wel-

“> fare.” Gottfried v. sa ii 73 N YS. 2d 692, 695 (S. Ct. |

: “ | . ae, —

stitute their. pores jen for that. of the directors

stemming from non-corporate considerations, for example,

iiaindermen, lacks the business basis which. can alone justify ee

desire. to prefer. income apeorng baad at sce epee "

‘Fletcher ‘summarizes jase ale | as. follows: § iwesier: the S:

ments and improvements of the company’s plant. ‘The dis-,-

unlimited, and it must be honestly exercised for the benefit —

of the corporation and all its shareholders.” Fletcher,

Cyclopedia Corporations (perm. ed. 1971) § 5325 at p. 633... - :

sheers ance of goed faith on the part of the directors...

tb MeNab-& Harti

N.Y. Co. 1947). : 3 7

11. siNiahe © Macss Drink Ca. 195 An ‘Div. 318, 187 N.YS.

- 158 (App. Div. Ist’ Dept. 1921); In re Barrows’ Will, 123: NYS. -

. 2d 501 (Surr. Ct. Monroe Co. 1953); City Bank Farmers Trust Co. .

ooh Bo Ballantine, Corporations § 231 ( rev. ed. _

v. Hewitt Realty Co., 257 N.Y. 62,.117.N. E. 309 (Ct. App. aay: .

™~

\ oo di gh

. ‘ a

4 $ i

1 * Abe

‘ . a y .

. . \ ‘

‘ bere ey

— , ]

. = ‘

“When ¢ the yeiuinite beiedeiaie justification is absent and

. bad faith is present, the courts ha e been resolute. in the

-_reinedies whieh they will i impose. . These include injunctiv ee”

* relief compelling the declaration: of a dividend in-a Teason-

_-able amount, and a retention of jurisdiction to assure that’ .

“reasonable dividends will be. paid in following years. Pat- -

ton v. Nicholas, 154 Tex. 385, 279 S.W. 2d 848\(S. Ct. 1955)...

. (deeree to’ declare” dividend. at earliest practical date ~

tnd thereafter to deélare ‘reasonable dividends. annually ,

_from future profits and aecumulated surplus); Lesnik v. .

* Public Industrials Corp. .. 144 F.2d 968 (2d Cir. 1944) |

(question for jury avhether directors’ failure to declare divi-_

! dends was pursuant to a conspiracy: to acquire a. share.

- holder’ s stock) ; Dodge v. Ford Motor Co., 204 Mich. 459, : i

170 N.W. 668 (S. Ct: 1919) (directors ordered to distribute;

substantial additional dividends when reason for non-

_Sedlaration was non-business purpose of providing more .

-cars at lower price to benefit public):

~ What the Government argues is that th ‘board of dives:

tors could, under applicable corporate law, improperly

+ dividends for the pu -of shifting income among trust

“beneficiaries and then build a.record through minutes and.

otherwise of the spurious exercise of business judgment.

. The ‘circumstances envisaged. by. the Government are the |

_ circumstances which, because they are pregnant with abuse, —

: have induced courts of equity to apply standards of good -.

faith and business: reasonableness.’ What the Gevernment __ .

"describes i is not a rule of law; one -who embarks

_._ upon a-ea of fraud and bad faith, whether he be -

trustee or corporate fiduciary, may: seek to get away with. :

Sach is not the test of whether aijeliee fiduciary Pecrcs

exist... iia aN is

In summary, under. applicable trindiples of corporate

law, the. discretion of the decedent was — to Judicial 3

: . 4 - .

- » .” ° ”

. a - ri - . °

r . ‘ pee - eet 7 j °

. y Fs : .

~ 5 as ° - ® . ,

tres, . . » y >, “ s — est . —— a ct eR cea

ea * . . : - . —s SN 5

, ‘ e. é q :

ci. & matin at ‘the: behest of affected eiehibdows: its range :

; of. permissible exervise: was circumscribed . by. standards .

of. fiduciaty obligation that- controlled his ability to shape

. dividend policy ; and p rsuit of a dividend policy motivated

by non-business considerations would have violated such

standards. As a epfporate fiduciary, the decedent’s discre-

tion was subject to ascertainable, external standards enforce-

* able against him in a court of equity, so that his powers

' were no* greater ‘than the administrative or managerial

‘powers that a settlor-trustee. may.reserve withoit i ingerring .

estate taxation. ; |

ae _The-docsdck did not: reserve ‘the enjoyment of the ft

~ transferred stock, 7 Pls se

The Government makes the alternative e€. argument that. the

_ ‘decedent’s: > exercisable through the board of directors, —

. to maintain: meee corporate employment and tebe con. .

-pensated therefor constitutes a reservation of enjoyment > |

of the stock transferted"it in trust. Pet: Br. 21- 5..

‘The. Government’ S. arg nt. has been: rejected by ‘the

cburis,. not only i in the decis ion below, but also’ in Y eazel,

supra, in Hofford, supra; and other Tax Court decisions =

. hereinafter cited. -No court has sustained it. _

ea offord a sole stockholder, immediately after entering

“into a contract with his,corporation for a fixed salary for

. Jife, transferred thé complete ‘stock ownership. to himself .

and others as trustees, : reserving in his individual capacity

" the right to veto sale of. the trusteed stock. The Tax Court ©

‘held, after intensive analysis of the fagts upon ‘the tax-

. “payer” 8 motion for reconsideration, that the decedent had

“* not’ “reserved enjoyment of the ‘stock ‘and, ‘therefore, that

: At id - Pes

; om i

: : . F ‘

ee Bere ee

. _ 4 - < 7 aes ©

., .

. the stock was not includible in his gross estate under what - — &

is now sectign 2036.” . This holdjng is supported by two —

_ similar Tax Caurt decisions involving outright transfers of — —_£

stock by the sole 6r dominant shareholder immediately after-——~

entry into a contract with the corgeration for 4 lifétime.

salary. Estate of William L.. Belknap, 10 CEF T.C.M. to,. -° ft

" ' (1951); George C. Doerschuck, 17-B-T-A- 1123 (1929).,

_. These decisions are clearly correct in holding that the ~~ &

| . Tight or opportunity to draw a réasonable salary froma

corporation does not amount: to ‘retained énjoyment of

“transferred stock in the corporation. “& reasonable salary

ig earned; its quid pro. quo is the Services ‘rendered. ©.

_. 'The’ standards ‘of fiduciary obligation that circumscribe.

corporate dividend policies (pp. 12-15; supra) also. cir-

___ ‘eumseribe corporate salary policies and bar the controlling . -

_ shareholder from treating the corporate entity. as his per-

_ sonal convenience. A dominant shdreholder is not per-

mitted to take advantage of his st ownership to yote him-

" self an excessive salary or to c@yse an excessive salary.tobe

_ voted to him by- the directors elected by him. ‘This Court °

"clearly recognized that principle in Rogers v. Hill, 289 U.S.

: vA

- The.leading copamentators suinmarize the rule as follows: 3

*[D]irectors must act honestly and reasonably in *

_ setting the compensation of officers and. executives

_ 12. In the Hofford. case the Tax Court distinguished and nar-_.

_Towly limited its earlier decision.in Pamelia D. Holland, 47 B.T.A. °*

807 (1942), reconsidered, 1 T.C. 564 (1943). In the Holland case.

the decedent had. retained, under an ‘alléged contract of. “sale” of the

" entire outstanding sfock of the corporation. by her and her husband —

to their children, an anfual “salary” répresenting a return of approx-.

‘imately 20 percent of the value 6f the corporation’s capital surplus

and equalling about three and one-half times its average earnings,

‘and caused the performance of. the undertaking. to be secured by the

stock: and ‘by retention of alf voting rights. The Government, relies

on Holland (Pet. Br. 22-23) while ‘conveniently overlooking its -

es — been limited by the Tax Court (4 T.C. at 794) to its peculiar -

: 2 te * ne Bag |

{Tin fixing coimplennaitiod ‘they’ will not be ‘per. 4

ee mitted to ‘w aste? the corperation’ s assets ... [C]om-

-the ability of the corporation to pay . . [C]ourts of.

-pensation must bear Solty. reasonable relation - not:

‘only to.the value ‘af the services-rendered but also to’.

Oppression of Business Associates: “Squeeze Outs” in

Small Enterprises (1961), at beste See also O'Neal, ;

SURG, at § 8.12: -«: - :

“Stockholders: or ieditees, cemak take a iatese

of ther. ownership of a controlling interest in the -

- corporation to vote to.themselves excessive-salaries

or to cause exetssive ‘salaries to be voted by persons

under their control. , Both the stockholders and the

directors in fixing compensation of officers must act .

in good faith and reasonably.” Ptenyr supra, at ~

g § 2132 (perm: ed. 28)..: Pe ae

The. Government, in deseritiins!: thie decedent's alleged:

power to ay oid diy idends and yet pay himself a generous" |

salary. deserihbes the circumstances that have impelled equi-

table intervention on behalf of ‘minority. shareholders.

Baker and Cary, Cases and Materials on Corporations (3d °

“ed. 1959), eases collected-at note 5, p. 1392. ‘These cases

‘surely provide little incentive for a dominant shareholder _

to.exercise his control,in the manner that. the Government

rather. eynically characterizes as a. routine incident of is

ajority: shareholder status. | 3 :

"Tlie enjoyment of a minority stock inecnat' ina corpora-.

os diode is the prerogative ‘of its owner. ‘It may not legally Mm

usurped by the controlling. stockholder through abuse ‘of on

corporate office. By. application of these fundamental prin-°

‘ ciples, it is clear that the decedent did not reserve. the ner

| ment of the. stock that he gave away. :

The scnctemi taxi decision, of Commissioner v . , Sannen, :

y 333 U.S. 591 (1948), on which the Government pelite,

is legally seed factually taappacite, << :

& Having no support in the estate tax. dinciching: the Gov-

ernment relies heavily upon this Court’s income tax de-

Gision in Commissioner v. Sunnen, 333 U.S. 591 (1948). Pet.

Moe

‘

-, Br. 12-15, 20. In so doing, the Government’ looks for ‘sup- Me

port to the wrong ‘body of tax law.

Sunnen was one of a series. of decisions in rr this tt

Court developed a broad economic concept.of gross income

~~ in the field of intra-family trusts and assignments.~ H elver-

»:

ing v. Clifford, 309 U.S. 331.(1940) ; Helveringv. Horst, 311° |

US. 112 (1940); Helvering v. Eubank, 311 U.S. 122-(1940) ;

“Harrison v. Schaffner, 312 U.S. 579 (1941); Commissioner

v. Tower, 327 U.S. 280 (1946) ; Lusthaus v. Commissioner, ~

.” 327 U.S. 298 (1946). ‘The income tax concept of substantial. |

economic ownership developed i in Clifford with respect’ to

short-term trusts and in H orst with respect to transfers of

: negotiable bond interest. coupons was extended i in Eubank aoe

to assignments of life insurance renewal commissions, in

r Schaffner: to assignment. of specified amounts of trust in- i

“\eome, and in Tower and Lusthaus to assignments ‘of family

“partnership interests. ° Stumnen, citing and relying on this

line of cases, 333 U.S. at 602-603, applied the sante principle

to. an assignment, of nonexclusive patent license contracts. i

The Clifford-H orst-Sunnen: doctrine of economic owner- °

‘ship flowered under the expansive wording of former sec-

tion 22a), 1 now section 61 of the Internal Revenue Code.

< e has not penetrated the estate tax, the statutory

oa ons of which define in detail the property interests ‘

af coors gross estate, leaving no room for the devel- . -

‘Opraent we any nica theory of substantial ¢ economic own-

ership. aes |

a In Helvering yy ‘Safe Dantedli é Trust: Co.; 316, US. °

a 186 (1942),. this Court limited the Clifford doctrine to areas

"where, unlike the estaté tax definition, of the gross estate,

“the language of a statute andits legislative history do not. ~

3 afford more specific inditations of legislative intent.” 316 .

"OLS. at 58-59, note 1.- Six years later, in: ‘sétting the Church ey

: . ‘and Spiegel cases for reargument (see pp..6-7, supra), this

~ Court directed ‘counsel to. discuss the following, question:

~ “g. What is the effect of. ‘the tilings’ of H ‘elvering v.Clifford

(309 U.S. 331) tipon these tr&sts?”" 335 U.S. at 717,‘note 5. -

Significantly, this Court, after consideration of the redrgu-. :

_ment, did not rest its Church and Spiegel decisions’ to any

‘extent upon. the: ‘Clifford doctrine.“ wn

After repeatedly declining to apply the Clifford aan ,

in any estate. tax case,'’ the Tax Court definitely concluded

" in Estate of Alexander K. ig weak 8 CCH T.C.M. 1056 .

(1949): |

“Nor. a we hold this ieunk indndible ; in Pat

~ dent’s estate as falling within ah of tiie

The Government, conceding i in ‘its brief on rea ent tht,

: frictly speaking, Clifford. had no estate tax application, asked this

Court, in effect, to utilize Clifford asa pretext for peertarning the .

Northern Trust decision.

14. ‘The reasons {which we have already IE why the ~

. Clifford. doctripe is’ inapplicable to the estate tax are percéptively :

stated in Justice Burton’s . eating opinion? in the S piegel case. -

335: U.S. at 712-718. ¢

°-15. Estate of Henry S. Downe, cnpre: ‘Estate i Samuel S. Lind-

say, 2 T.C.:174 (1943): Estayyof f Edward E. Bradley, 1.T.C. 518

(1943), aff'd, 140 F.2d 87 ( ir. 1944); Estate,of E alfa! Lathrop

Ballard, 4 B.T.A.. 784 (1942), a of 4, .138 F.2d sD (2d Cir. 1943);

Estate of Frederick S. Fish, 45 B:T.A. 120 (1941); Estate of Walter -

‘B. Roddenberry, Sr. 8-CCH T.C.M. 781- (1949); Estate of Ben-.

T.C.M. 59 (1945); Estate of Maurice Markson, supra. - See also -

Delaney v. Gardner, 204 F.2d 855 (1st Cir. 1953); oe Tes

Co. Vv. — 137 F.Supp. 52 =— ‘Micky 1985).

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21 = oo

»Clifora sar See H ines v. Safe Depieit é Shut noe

*. Comy altimore, 316 U.S. 56, wherein the doc- ..'. :

“Bethe oft of: ‘substantial ownership’ was rejected in the. <<:

estate tax field. ’\8 CCH T.C.M. at 1059. un

"Equally i in point is the following | statement of the First.

: - Cireuit i in Higgins v. Commissioner, 129 F.2d 237, 239- -240

mets: Cir. 1942), cert. denied, 317 Us. 658: “Helvering v. -

-Bubank,. 1940, 311 U. S. 12 | . «is another’ instance of 4.

transfer where the donor must continue paying.an income |

tax, byt where the value of the. ‘property transferred will

‘ not be iteluded ‘i in the donor’s gross eState at his death.” -

In short, there is ‘simply’ x no correlation between the in-

come and estate tax statutes in the field of- incomplete

transfers. See Commissioner v. Douglass’ Estate, 143 F.2d.

961, 963 (3d Cir. 1944); Higgins v. Commissioner, supra, °°

- at 239-241; Federal Estate and Gift Taxes, A Proposal a

. lntegralion and for Correlation with the Income Taz, .

‘ United States Government . Printing Office (4947) 9-11; ~~

: .DeWind, The Approaching Crisis in Federal Estate =

Gift Taxation, 38 Calif. L. Rev. 79, 98-104 (1950). - -

~- legal irrelevance to the estate tax of the substantive i ee :

__ tax holding in Sunnen is sO marked that that holding has

never been referred to in any estate tax. deéision. os

, Stinnen is also factually inapposite. The taxpayer in. °-

Busteen, an inventor-patentee who had ‘entered into four

e nonexclusive license agreements with a controlled corpora- SS

tion, assigned to his wife his interest under the agreements.

‘Either party had the right to cancel the agreements upon +

written notice. of ‘either six months or oné year. The tax-

' “payer retained ownership of the patents ‘and, therefore,

’ ‘the right to enter into licenses with 6ther parties, thus

"16. Similarly, in'Commeissioner-v. Prouty, 118 F.2d 331, 337 (1st

Cir. 1940), the First Circuit rejected the Commissioner’s argument

pe the os doctrine should be — into the gift tax law.

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diverting aeiiiied ‘from his wife. All of these’ ‘ eonsidera-

» tions, and not merely the taxpayér’s role as controlling

~ _stockholder, caused this Court to conclude that the taxpayer ._

“had ‘not’ effectively shifted’ the incidence of income — S.

lability. ode ge nk : oe

: ‘his case calls for application of the doctrine a

oe stare decisis. : :

ae = ee we

: The Goverriment - here asks this Court to take an. initial

— step in wndermining with retroactive effect the ‘ well-

- established rules with respect to managerial and adminis-

. trative - powers founded —_ the:: fS-yoer old Northern

Trust decision: |

The Government beguilingly tries to white that initial

step look as short ard harmless as possible. In the process — .

it attempts to distinguish case after case,. saying: Northern —

- Trust, swpra, was decided under prior law (Pet. Br. 18-19) ;

the investment powers in King, supra, were not over stocks

of controlled corporations (Pet . Br. 11, note 5).; powers

held as trustee‘are different because they are governed by

rules requiring impartiality (Pet.-Br. 17-18 and 19- 20); the.

income tax decision of United States v. Gates, 376 F.2d 69 |

“(10th | Cir. 1967), is distinguishable becatise the settlor in

"| that case could not prevent sale of the trusteed stock (Rete

> _ * Br. 18, note 8).

The Government’s modest: ahenieih of its goals oad

not déeeive anyone. who is. familiar with its often-played

role in the drama of camel’s nose and tent. There are many -

ominous: signs. that the Government’s objectives are much

more ambitious: (1) the Government’s stubborn relitigation

of the Northern Trust holding in -27 subsequent cases ; (2).

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"> the Commissioner’ S outstanding nonacquiescence in the Tax

.Court’s King decision, involving investment ‘and voting

powers ver a securities portfolio (1963-1 C.B. 5); (3) the

Commissioner’s publication.in*1967 of a raling that defines,

the taxable area to include the situation in which the settlor

is a trustee (Rey. Rul. 67-54, 1967-1 C.B. 269; see ‘comment

: thereon -in. 21 The. Tax Lawyer 444 (1968)) ; (4). the ‘con-

tinuing refusal of the Commissioner to accept -the Tax

—Court’s decision in Hofford that the stock transferred in ~~

trust was not ineludible in the gross estate (nonacqui-

escence on that issue, 1945 CB. 4); and $5) the assertion

of tax in the estate of which the amici curtae are executors,

_- despite the fact, that the decedent, as one of. three trustees .

. of whom a majority could act, was powerless to prevent

~ sale of the stock by the other, two trustees. - '

These indicia show that it matters not to the Government

' property involved is stock in a controlled : corporation. or.

- liquid secarities, or whether the, deceased settlor could have

- blocked sale of the trust il

. . Schuck, supra.

‘stock. If so, what*prevents —

- taxation of outright gifts

ment has attempted to tax stock given outright during life.

Estate of George H. BurzAd CCH T.O.M, 1055. (1945) ;,

Estate: of William L. Belk P, eae ‘George C. Doer-

* Tt will not suffice for the’ Scand to answer that the

gift here was not outright, that the decedent was not trus-

. tee, that’ the trust assets were not portfolio securities, and

that the decedent-could veto sale of the stock. In an area .

' so filled with long- established precedent, this. Court should ‘

. not be asked to embark on a new course without some indi-

_ eation of ‘where it leads. There - should be some reliable

answer to: whether ‘the Government's goal here and the

Northern Trust line of decisions can harmoniously survive |

¢ ° : ; : ;

| stock? ‘In fact, the. Govern-:. ’

and; if so, where the line can be dtawn. . We respectfully _

-e-. submit that the only place a logical line can be drawn is.

where the court below. has drawn i. ea,

_ During the 42 years ,that ‘the. Treasury has fruitlessly :

challenged the Northern Trust doctrine in 27 litigations, it

has worked with the Congress on five legislative restructur-

‘ings of-section 2036 and its predecessors: In 1931,” 1932,8

“eounseled. the Congress in overturning nine. decisions of

this Conrt relating to what is now section 2036. 2 Whatever .

_ discontent: the Treasury had with the NV orthern Trust hold- -

—«. those or other occasions. Having failed to utilize those

opportunities, the Treasury should be foreclosed from seek-

_ , ing a remedy in.this Court at this late date.”

’ For the 55 years that Americans have lived and died

under the regime of the-Federal estate tax, apparently. no,

trust has been taxed—certainly none willing to litigate has

* been taxed—because of reserved managerial or adminjstra-

_ tive powers. - The-Court is being asked here to subject to -

tax an indeterminate—perhaps broad—category of trusts.

1 pean ib Sula i eo ~s AMe e ti R CI e sic AN ALD a asl caoseanal

. . . ”

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‘

Welt

4 “7. "Joint Resolution 529 of March 3; 1931.

q 18. Revenue Act of 1932, section 803(a).

19. Technical Changes Act of 1949, sega and 8.

_. 20. Technical Changes Act of 1953, on 207. .

21. Internal Revenue Code of 1954, section 2036.

-- 22. The 1931 and 1932 legislation overturned Mey Vv: Heiner, 281 .

U.S. 238 (1930), Burnet v. Northern Trust Co., 283 U‘S. 282

(1931), Morsman v. Barnet, 283 U.S..783 (1931), ‘and McCormick

v. Burnet, supra. The 1949 and 1953 legislation overturned Fidelity-

» Philadelphia Trust Co. v. Rothensies, 324 U.S. 108 (1945), Commis-

sioner v. Estate of Field, 324 U.S. 113 (1945), Goldstone v. United .

States, 325 U-S. 687 ( 1945), and Estate of Spiegel v. Commissioner,

. > supra@. -The 1949 and 1954 legislation pong cml C ommissioner V.

— of Church; supra...

1949," 1953,” and 1954. . In this process the Treasury has i

‘that have for decades been regarded as nontaxable. The

* Federal estate tax is a capital levy with rates ranging i

' ‘upward to 77 percent. The unexpected aggregation of an.

inter vivos trust. with the testamentary estate can wreak °

havoc with estate planning and even leave the testamentary .

beneficiaries penniless. If the long-established Northern

Trust holding is -to be changed, this responsibility should ee

be left to Congress, which can, give notice of the proposed —

_. change, hold hearings, make the change ‘prospective only,

create graee periods for relinquishment of taxable powers,

? and provide other relief. Under. any reasonable. view of —

the situation, the Government is asking the wrong body to

' make the wrong decisioh at the wrongtime. = =

The Government shas twice persuaded this Court to dis-.

regard stare decisis in construing whatvis now section 2036

of the Internal. Revenue Code. The Government here in-

_vites the court to embark on a third such departure.

Review of these other two instances and‘the Congressional .

_ - overriding that: followed ‘further indicates ‘the undesira-

» bility of the Government’s present proposal. (1) Ini 1940 in—

_ Helvering v. Hallock, 309 U. S. 106, this Court, at the urging .

of the Government, expressly overruled its 1935 decisions - , - s

in Helvering v. St. Louis Union Trust Co., 296 U. 8. 39,and oc. gl

_ Becker v. St. Louis Union Trust Cé., 296 U.S. 48 Heed:.°-. E 7

ing criticism of the Court’s action, Congress amended section, 3

- 811(¢): of the Internal Revenue Code of. 1939 (now. section .&

- 23. The trusts in. those three cases all provided for reversion of

the ‘trust properties to the settlors if _they should outlive the bene-

ficiaries. - Having: decided in the two St. Louis Union Trust cases

that passage of title to the trust properties was enough to ‘render

the predecessor of section:2036 inapplicable, the court shifted" to the’

-.. Opposite view in Hallock,’ Over the dissenting opinion of Justice

. Roberts in support of stare decisis, this Court introduced in Hallock - -

the first of a line of decisions that based the estate tax on the reten- —-

tion of. more and more remote Teversionary interests. Fidelity-—

Philadelphia Trust, supra;- Field, supra; Goldstone, supra; and,

: ly, the controversial “gossamer. thread” arising by operation of

law in Spiegel, supra, 335 U.S. at 667-674, 703-708, 718-735. °

° . ; | “ 26 .

2036 of the Internal Revenue Code of 1954) to erode the

dectsions' and to authorize the filing of claimis for refund -,

ee without regard to the doctrine of res judicata.” (2) In 1949

in Church, supra, this Court, upon the request ‘of the Gov-

ernment following the setting of the case for reargument, |

explicitly overruled its 18-year: old ‘decision in May vy.

Heiner, supra, three 1931 per curiam decisions that followed °

and extended the rule of the May case,* and its 1938. deci-

sion in Hassett v* Welch, 303 U. S. 303. Inthe face of -

spirited dissents sdinctating the wisdom of stare decisis,

this Court overturned 18-years of estate tax history. ‘Heed-

ing the resulting criticism, Congress re aes the rule that

Church had overturned.” ; | Pe.

Even. if the question presented here were one of first

impression, the rule of law the Governnient. seeks to estab-

__,-lish would represent highly. questionable tax policy. When

_-the question is éxamined in the light of the long. judicial

and legislative history, the Government’s request, if it

_ should be made at.all, shonld be made to Congress. From —

the standpoints of both history and logic, the Sereuaeer® |

plea to this Court should fail.

74. "Public Law 378, 81st Cong. ( Technical Senet Act of. £1949),

_ section 7; Int. Rev: Code of 1954, section 2037-(a)..:

25. Burnet v. Northern st Co., supra; “Morsman v. Burnet, :

supra; McCormick v. Burnet, Supra.

"26. In May ‘and the three _per curiam decisions, this Court held

that retention of a life estate in transferred property did not attract

' the estate tax if transfer of title was effective. After Congress had

enacted remedial legislation on the day following the three per curiam —

decisions, this Court decided ‘in Welch that’ the remedial legislation

* applied prospectively only. ~

' '27. Public Law 378, 81st Cong. (Technical Changes Act of 1949),

sections’ 7 and 8; Public Law. 287, 83d Cong. (Technical Changes

Act of 1953), ‘section 207...

3 CONCLUSION i

| ‘The decision below should be affirmed. | at | : ;

: Respectfully ‘submitted,

ee Soeom Ririsp,

Pavt, Weiss, Rrrkry, | . 7

Waarton & Garrison,

4 Maurice: AusTIn,/

Of. Counsel. :

January 21, 1972 a

‘e

“\

PH Be. uf as Sac com _ ” Ate SaeeteRe es ee io

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